A Registered Retirement Savings Plan can help you save for retirement. Before March tax filing time, there is often a rush to buy RRSPs. That’s because RRSPs can offer tax advantages. And the earlier you start saving for your retirement, the better. A longer time horizon and compound interest make investing early for your retirement a good idea. Learn more about RRSPs and how they work.
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What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a kind of savings plan designed to help you save for retirement. Along with saving for retirement, RRSPs have special tax advantages and benefits that can help you before you retire. Anyone who files an income tax return and has earned income can open and contribute to an RRSP.
There are many places where you can open an RRSP:
- Banks and trust companies
- Credit unions and caisses populaires
- Mutual fund companies
- Investment firms (for self-directed RRSPs)
- Life insurance companies
You can open an RRSP at any age as long as you have earned income and file a tax return.
You must close your RRSP when you turn 71.
Watch our video: What is an RRSP?
Why should you use an RRSP to save for retirement?
There are many advantages to saving for retirement using an RRSP. It provides advantages that a savings account doesn’t, including:
1. Your contributions are tax deductible. Your RRSP contributions reduce your taxable income. That means you may owe less at tax time or get a larger refund. You get immediate tax relief by deducting your RRSP contributions from your income each year. Effectively, your contributions are made with pre-tax dollars.
2. Your savings grows tax-free while in the plan. Any interest or investment earnings you make from the money in your RRSP is not taxed if it stays in the plan.
3. Deferral of taxes on your income. Because your RRSP contributions are made with pre-tax dollars, you won’t pay tax on that money until you withdraw it from the plan. That includes both your investment earnings and your contributions.
For most Canadians with moderate to high incomes, it’s likely that your marginal tax rate will be lower in retirement than during your contributing years. For this reason, you’re likely to pay less tax on the income when you withdraw it, than you would have during your working years.
4. You can convert your RRSP to get regular payments when you retire. You can transfer your RRSP savings tax free into a Registered Retirement Income Fund (RRIF) or an annuity when you retire. You’ll pay tax on the regular payments you receive each year — but if you’re in a lower tax bracket in retirement, you’ll pay less tax.
5. A spousal RRSP can reduce your combined tax burden. If you earn more money than your spouse, you can help build their tax-free savings by contributing to a spousal RRSP. Retirement income will then be split more equally between the two of you. This may reduce the total amount of tax you pay.
6. You can borrow from your RRSP to buy your first home or pay for your education. You can take out up to $35,000 for a down payment for your first home under the Home Buyers’ Plan (HBP). You can also take out up to $20,000 to pay education costs for you or your spouse under the Lifelong Learning Plan (LLP). You won’t pay any tax on these withdrawals as long as you pay the money back within the specified time periods.
How much can you contribute to you RRSP?
There are limits on how much you can contribute to your RRSP each year.
You can contribute the lower of:
- 18% of your income in the previous year, or
- the maximum contribution amount for tax year.
You can check your RRSP contribution room in your CRA MyAccount, along with information about your TFSA contribution room and Notice of Assessment. You receive this Notice of Assessment after you file your tax return.
If you don’t have the money to contribute in one year, you can carry forward your RRSP contribution room and use it in the future. If you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP.
Try our RRSP savings calculator to estimate how much your plan will be worth at retirement and how much income it will provide each year.
Both RRSPs and Tax-free Savings Accounts (TFSAs) can be used to save for retirement.
If you are in a lower income bracket, it may be more useful to start saving in a TFSA.
Consider the differences between a TFSA and an RRSP.
What can you hold in your RRSP?
Like other registered savings plans, RRSPs can hold savings deposits and investments.
Qualified investments – allowed to be held in an RRSP – include cash, gold, GICs, bonds, mutual funds, ETFs, and more.
Investments that cannot be held in an RRSP include precious metals, commodity futures contracts, real estate, and other prohibited investments.
Learn more about the rules for contributing to an RRSP.
UNDERSTAND THE RISKS
The value of your RRSP may go down or up depending on the investments it holds. Learn more about investment risks.
REMEMBER
Consider the tax implications of where you hold your investments. If you have both registered and non-registered accounts for investing, consider using your RRSP to hold investments that are taxed at a higher rate, such as GICs and bonds. Investments taxed at a lower rate – such as those that generate dividends – could go in your non-registered account.
Learn more about how investments are taxed.
What are the different types of RRSPs?
There are three main types of RRSPs. While an individual RRSP is the most common, the other options, spousal or group, may also appeal to you.
1. Individual RRSP
An individual RRSP is an account that is registered in your name. The investments held in the RRSP, and the tax advantages associated with them belong to you. You can choose to build and manage your RRSP investment portfolio yourself with a self-directed RRSP or work with an advisor.
2. Spousal RRSP
A spousal RRSP is registered in the name of your spouse or common-law partner. They own the investments in the RRSP, but you contribute to it. You get the tax deduction for any contributions you make to a spousal RRSP. Any contributions you make reduce your own RRSP deduction limit for the year. They won’t affect how much your spouse can contribute to their own RRSP.
A spousal RRSP is a way for you and your spouse to split your income more evenly in retirement. That means the combined income tax you pay as a couple may be lower than what you would pay if all your savings were in a single RRSP. You may want to do this if you earn more money than your spouse and you’re likely to be in a higher tax bracket when you both retire. Or if you have a pension plan and your spouse doesn’t.
To qualify for a spousal RRSP, you must:
- have lived together as a couple for at least 12 months,
- have a child together by birth or adoption, or
- share custody and support of your partner’s children from a previous relationship.
If your spouse takes out money you have contributed:
- within three years of the contribution date — you’ll have to pay tax on the withdrawal amount
- three years after the contribution date — your spouse will pay tax on the withdrawal amount.
If your relationship ends:
- if you are married — spouses generally must divide assets equally
- if you are living common-law — consider drafting a joint agreement to cover this situation as assets may not necessarily have to be divided equally.
Spousal RRSPs are used to equalize retirement income and minimize tax. It doesn’t make sense to open a spousal RRSP if your spouse’s income will be roughly equal to yours when you retire.
3. Group RRSP
Some employers offer group RRSPs as a benefit to help employees save for retirement. You open an individual RRSP, but you contribute to it through your employer. The RRSPs of all of the employees are held at the same financial institution. Here’s how it works:
- Your plan contributions are usually automatically deducted from your pay. Your employer may match or add to your contributions.
- Your employer usually pays the costs of opening and managing the plan. You pay any investment costs.
- The range of investment options is usually limited, depending on where the group RRSP is held.
- The rules for when and how much money you can take out of the plan vary depending on your employer.
It’s important to understand how your group RRSP works. The choices and rules vary depending on your employer and where the plan is held. Learn more about group RRSPs.
What are self-directed RRSPs?
A self-directed RRSP account allows you to play a more active role in choosing and managing the investments in an individual or spousal RRSP.
Self-directed RRSPs are available at investment firms — both full-service and discount brokerage firms. You can hold many different types of investments in a single self-directed plan. This makes it easier to keep track of your investments and maintain your desired asset mix.
A self-directed RRSP may be suitable if you:
- want access to a broad range of investment options.
- are a knowledgeable investor.
- have time to manage your investments.
As with any account, learn about all the fees for opening and managing your self-directed RRSP. You may pay a set-up fee, an annual trustee fee, and sales charges or commissions for buying and selling investments. You may also pay a fee for investment advice or for managing your investments. Commissions are likely to be lower at a discount brokerage, but you’ll need to be comfortable making investment decisions on your own.
DO YOU NEED INVESTMENT ADVICE?
If you’d like advice on how to invest and manage your RRSP savings, open an account with a full-service brokerage. If you don’t need advice, set up your RRSP account with a discount brokerage and lower the fees you pay. Learn more about getting advice.
What fees will you pay for your RRSP?
Fees for RRSPs vary widely. What you pay depends on where you open your RRSP account and how you invest your savings. There are four main types of fees you might be charged:
1. Opening an account – There is usually no charge to open an RRSP account. Some institutions may charge a small set-up fee.
2. Annual administration or trustee fee – The annual fees for RRSPs can vary. If you have a group RRSP, your company may cover this cost for its employees. Make sure you understand what these fees are before you open an account.
3. Investment costs – You pay a commission when you buy and sell stocks and ETFs for your plan. You may pay a sales charge when you buy mutual funds for your plan, or when you sell them. You’re also charged a management expense ratio (MER) if you hold mutual funds or ETFs.
4. Other costs – Most plans charge fees for certain services. This could include a fee for transferring money to another RRSP or closing the RRSP.
Ask your financial institution if they will waive the annual fee. They may agree to do this if you hold other accounts there or if you have enough savings in your plan.
Remember
When choosing an RRSP, find out what the fees are, specifically for opening, administering, transferring money, or closing the RRSP. Don’t be caught by surprise later if you need to make a change.
Summary
A Registered Retirement Savings Plan (RRSP) is a savings plan designed to help you save for retirement.
- Anyone with earned income, who files a tax return, can open an RRSP.
- You can get an individual, spousal or group RRSP.
- Your RRSP contribution room carries forward if you do not use it all each year.
- You can hold investments and savings in an RRSP. Your savings grow tax free while your money is in the plan.
- You can have an RRSP, and other savings plans such as TFSAs.
- When you retire, your RRSP can be transferred to a RRIF or an annuity.
